Finding an investor for a small business can be one of the toughest jobs of an entrepreneur. Plenty of people have the funds and capital to invest in your business, but a very few have the knowledge and understanding of investment focus and risk tolerance to become an investor for your small business. You must find the right potential small business investor and inspire him to risk their money on you and your business plan.
Investment is a key element of growth for small businesses, but acquiring investors can sometimes seem like an insurmountable task, leaving business owners with the idea that they will have to rely solely on their friends and family members to invest in their company. The fact is that there are plenty of people who are willing to invest in your small business, but only if they have a reasonable expectation that they will receive a return on their investment. Your job is to convince the potential small business investors they will receive a return by laying a solid foundation for investment.
- You first need to have a very solid business plan to attract an investor for your small business. The purpose of a business plan is to prove that you know all facets of your business and the plan’s primary audience is your potential investor for your small business.
- Have fellow entrepreneurs or business consultants review the plan. Find them at business incubators, which are government-sponsored institutions that support start-up companies. People in a local start-up company community welcome entrepreneurs to their networks and are happy to give feedback. If they don’t have the time because they are too busy, they can at least point you to people who can help.
- You need to write a three page executive summary and a one page executive summary of your business plan. A potential investor for your small business will eventually ask for an executive summary and most of them want either a one page version or a version of three to four pages.
- Apply to join an incubator. The act of applying will teach you how to explain your business plan in writing and through live presentations. It also will connect you with people who know the local investor landscape and who can advise you on where to find capital.
- Prepare and rehearse your presentation. You may be allowed longer presentations, but most initial pitches are eight to twelve minutes.
- Network with your local start-up business community. The chance that someone will point you toward an investor interested in your small business and possibly make an introduction, is much greater than the chance that someone will steal your idea or decide to compete against you. Incubator websites will announce the times and locations of events for meeting people in the network.
- You need to resist the temptation to approach every small business investor you find, since it will waste your time and theirs. Target a small business investor who has a record of deals and an expressed focus on your industry, your geography, and your company’s stage of development. You can search and look through the Internet for angel groups that match your business. Read their investment criteria. They will provide good enough detail for you to know if they have potential interest in your company, then make a list of those who do.
- Follow the application procedures for the small business investors on your list. They will either tell you what they want or write it on their websites. This may include paying a fee, altering the length, content and format of your business plan, sending a PowerPoint presentation.
- One of the most important things you can do to attract a potential investor to your small business is to demonstrate a track record of growth. A small business investor likes to invest in companies that have a proven ability to achieve bottom line growth. You do not necessarily have to set the world on fire, but you do need to be able to show the potential small business investor that you are able to consistently set and meet your goals.
- You should also be prepared to present the potential small business investors with a written agreement dictating the terms of their investment and an exit strategy detailing the process for divestment.
A written investor agreement accomplishes several things. It communicates to the small business investor that you are serious about investment and indicates that you have taken steps to prepare for it. An investor agreement also boosts small business investor confidence because it clearly spells out what will be expected of them should they decide to invest in your business as well as legal security for their investment. At the same time, it safeguards your rights and responsibilities by providing you with a documented agreement regarding the scope of the investment relationship.
- Along with a track record of growth, a small business investor will also want to see financial statements that correspond with the goals and strategies laid out in the business plan. If the numbers indicate that your company is in the midst of a financial crisis or if they do not back up the expectations you have communicated to them, small business investors will be wary to commit. It is not a bad idea to go over your financial statements with your accountant before you approach potential small business investors. In some cases, you might be able to take steps to make your financials more attractive for investment.
- You need to prepare a valuation for your company. Compare your company to companies of known valuation that are similar to yours to estimate your growth potential and base your present value on predicted cash flows per a discounted cash flow model. You will need a valuation in mind if a small business investor wants aboard so that you know how much of your company he or she should buy for a given investment.
Thus finding small business investor won’t be a daunting task anymore if you have carefully studied and done all your homework about your business and the industry, because once you are sure and confident about your business plan and in fully believe in yourself, you have at least nailed the first step spot on, the rest will slowly fall in place.